U.S. Postal Service
Key Elements of Comprehensive Postal Reform Gao ID: GAO-04-397T January 28, 2004Both the Presidential Commission on the U.S. Postal Service and GAO's past work have reported that universal postal service is at risk and that reform is needed to minimize the risk of a significant taxpayer bailout or dramatic postal rate increases. GAO has testified that Congress should enact comprehensive postal reform legislation that would clarify the Postal Service's (the Service) mission and role; enhance governance, transparency, and accountability; improve regulation of postal rates and oversight; help to ensure the rationalization of the Service's infrastructure and workforce; and make needed human capital reforms. The administration has also supported postal reform, outlining guiding principles intended to ensure that the Service: implements best practices with a governing body equipped to meet its responsibilities; enhances transparency of timely and accurate data on postal costs and performance; provides greater flexibility for the Service to meet its customer obligations; ensures accountability through appropriate independent oversight; and keeps the Service financially selfsufficient, covering all of its obligations. GAO was asked to discuss comprehensive postal reform in light of these principles. This testimony is largely based on prior GAO reports and testimonies.
GAO believes that comprehensive postal reform is urgently needed. The Service achieved notable success in fiscal year 2003, but this respite is likely to be shortlived. The outlook is for continuing declines in the core business of First-Class Mail, while some key costs are rising and productivity gains are likely to slow. There are four key postal reform issues that need to be addressed. The Service's Mission and Role as a Self-Financing Federal Entity: The Service has a broadly defined mission that enables it to engage in unprofitable and costly endeavors. In our view, the time has come for Congress to clarify the Service's core mission and ensure continuity across changes in its management. Key issues include what should be the scope of the postal monopoly, and should the Service retain its regulatory functions. Governance, Transparency, and Accountability Mechanisms: Better governance, transparency, and accountability mechanisms are needed. Qualification requirements are too general to ensure that board appointees have the experience needed to oversee a large business-like operation. Enhanced transparency and accountability mechanisms are also needed for financial and performance information, such as reporting requirements. Flexibilities and Independent Oversight: The Service needs additional flexibilities so it can generate needed revenues, contain costs, and provide quality service. Major changes to the rate-setting structure are needed to enhance flexibility, encourage greater cost allocation, provide better cost data, and strengthen independent oversight. Also, current legal and other constraints serve to limit the Service's ability to rationalize its infrastructure and workforce, including closing unnecessary post offices. Human Capital Reforms, Including Pension, Benefit, and Escrow Issues: Outstanding human capital issues include the Service's responsibility for pension costs related to military service, funding the Service's significant obligations for retiree health benefits, and determining what action to take on the escrow account established as a result of the enactment of P.L. 108-18. Other key areas for reform include workers' compensation and pay comparability.
GAO-04-397T, U.S. Postal Service: Key Elements of Comprehensive Postal Reform
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Testimony:
Before the Special Panel on Postal Reform and Oversight, Committee on
Government Reform, House of Representatives:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EST:
Wednesday, January 28, 2004:
U.S. Postal Service:
Key Elements of Comprehensive Postal Reform:
Statement of David M. Walker, Comptroller General of the United States:
GAO-04-397T:
GAO Highlights:
Highlights of GAO-04-397T, a testimony before the Special Panel on
Postal Reform and Oversight, House Committee on Government Reform
Why GAO Did This Study:
Both the Presidential Commission on the U.S. Postal Service and GAO‘s
past work have reported that universal postal service is at risk and
that reform is needed to minimize the risk of a significant taxpayer
bailout or dramatic postal rate increases.
GAO has testified that Congress should enact comprehensive postal
reform legislation that would clarify the Postal Service‘s (the
Service) mission and role; enhance governance, transparency, and
accountability; improve regulation of postal rates and oversight; help
to ensure the rationalization of the Service‘s infrastructure and
workforce; and make needed human capital reforms.
The administration has also supported postal reform, outlining guiding
principles intended to ensure that the Service: implements best
practices with a governing body equipped to meet its responsibilities;
enhances transparency of timely and accurate data on postal costs and
performance; provides greater flexibility for the Service to meet its
customer obligations; ensures accountability through appropriate
independent oversight; and keeps the Service financially self-
sufficient, covering all of its obligations. GAO was asked to discuss
comprehensive postal reform in light of these principles.
This testimony is largely based on prior GAO reports and testimonies.
What GAO Found:
GAO believes that comprehensive postal reform is urgently needed. The
Service achieved notable success in fiscal year 2003, but this respite
is likely to be short-lived. The outlook is for continuing declines in
the core business of First-Class Mail, while some key costs are rising
and productivity gains are likely to slow.
First-Class Mail Volume Growth, Fiscal Years 1984 through 2003:
[See PDF for image]
[End of table]
Key postal reform issues that need to be addressed are:
The Service‘s Mission and Role as a Self-Financing Federal Entity:
The Service has a broadly defined mission that enables it to engage in
unprofitable and costly endeavors. In our view, the time has come for
Congress to clarify the Service‘s core mission and ensure continuity
across changes in its management. Key issues include what should be
the scope of the postal monopoly, and should the Service retain its
regulatory functions.
Governance, Transparency, and Accountability Mechanisms:
Better governance, transparency, and accountability mechanisms are
needed. Qualification requirements are too general to ensure that
board appointees have the experience needed to oversee a large
business-like operation. Enhanced transparency and accountability
mechanisms are also needed for financial and performance information,
such as reporting requirements.
Flexibilities and Independent Oversight:
The Service needs additional flexibilities so it can generate needed
revenues, contain costs, and provide quality service. Major changes to
the rate-setting structure are needed to enhance flexibility,
encourage greater cost allocation, provide better cost data, and
strengthen independent oversight. Also, current legal and other
constraints serve to limit the Service‘s ability to rationalize its
infrastructure and workforce, including closing unnecessary post
offices.
Human Capital Reforms, Including Pension, Benefit, and Escrow Issues:
Outstanding human capital issues include the Service‘s responsibility
for pension costs related to military service, funding the Service‘s
significant obligations for retiree health benefits, and determining
what action to take on the escrow account established as a result of
the enactment of P.L. 108-18. Other key areas for reform include
workers‘ compensation and pay comparability.
What GAO Recommends:
www.gao.gov/cgi-bin/getrpt?GAO-04-397T.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Mark Goldstein at
(202) 512-2834 or goldsteinm@gao.gov.
[End of section]
Chairman McHugh and Members of the Special Panel:
I am pleased to be here today to participate in this hearing on postal
reform. In my testimony today, I will focus on (1) the need for postal
reform and (2) key areas for comprehensive postal reform. Recently, the
U.S. Postal Service (the Service) has gained some financial breathing
room primarily because legislation enacted in April 2003 (P.L. 108-
18)[Footnote 1] has reduced the Service's payments for its pension
obligations. The Service's net income in fiscal year 2003 was a record
$3.9 billion, of which about $3 billion was the result of this
legislation. In addition, the Service reported that it has made notable
progress in its cost-cutting efforts. In fiscal year 2003, the Service
downsized its workforce by 27,000 employees, increased its productivity
for a record fourth consecutive year, and achieved $1.1 billion in cost
reductions. As a result, the Service reduced its debt by $3.8 billion
in fiscal year 2003 to $7.3 billion at the end of the fiscal year. The
Service also maintained high levels of customer satisfaction and timely
delivery of collection-box First-Class Mail, setting new records in
each of these areas. The Service is justifiably proud of these
achievements.
However, as the Service has recognized, its respite is likely to be
short-lived, given increasing competition and the Service's formidable
financial, operational, and human capital challenges. As the
President's Commission on the United States Postal Service (the
presidential commission) noted, the nation's communications,
technology, and delivery markets have seen vast changes since the
Service was created by the Postal Reorganization Act of 1970.[Footnote
2] New types of electronic communications include the use of e-mail,
wireless technology, and electronic bill payment services. These
technological advances appear to have placed First-Class Mail volume in
the early stages of a long-term decline. In addition, the Service faces
increased competition from private delivery companies, some of which
have established national ground delivery systems and a national
network of retail facilities. In this new environment, unless the
Service's operating expenses can be reduced correspondingly, with a
rightsizing of both its infrastructure and workforce, it is
questionable whether affordable universal mail service can be sustained
over the long term with a self-financing public institution.
Recent developments strengthen our view that enactment of postal reform
legislation is urgently needed so that the Service can achieve a
successful transformation to modernize itself and continue as a viable
provider of universal postal service in the 21st century. To summarize:
* Declining mail volume: Total mail volume declined in fiscal year 2003
for the third year in a row--a historical first for the Service, which
has depended on rising mail volume to help cover rising costs and
mitigate rate increases. First-Class Mail volume declined by a record
3.2 percent in fiscal year 2003 and is projected to decline annually
for the foreseeable future. This trend is particularly significant
because First-Class Mail covers more than two-thirds of the Service's
institutional costs.
* Changes in the mail mix: The Service's mail mix is changing with
declining volume for high-margin products, such as First-Class Mail,
and increasing volume of lower-margin products, such as some types of
Standard Mail. These changes reduce revenues available (contribution)
to cover the Service's institutional costs.
* Increased competition from private delivery companies: Private
delivery companies dominate the market for parcels greater than 2
pounds and appear to be making inroads into the market for small
parcels. Priority Mail volume fell 13.9 percent in fiscal year 2003 and
over the last 3 years has declined nearly 30 percent. Once a highly
profitable growth product for the Service, Priority Mail volume is
declining as the highly competitive parcel market turns to lower-priced
ground shipment alternatives. Express Mail volume is declining for the
same reason. In addition, United Parcel Service (UPS) and FedEx have
established national networks of retail facilities through UPS's
acquisition of MailBoxes Etc., now called UPS Stores, and FedEx's
recent acquisition of Kinko's.
* Subpar revenue growth: The Service's revenues are budgeted for zero
growth in fiscal year 2004, which would be the first year since postal
reorganization that postal revenues have failed to increase. However,
as the Service has recognized, even the zero-growth target will be
challenging. In the absence of revenue growth generated by increasing
volume, the Service must rely more heavily on rate increases to cover
rising costs and help finance capital investment needs.
* Declining capital investment: The Service's capital cash outlays
declined from $3.3 billion in fiscal year 2000 to $1.3 billion in
fiscal year 2003, which was the lowest level since fiscal year 1986,
and far below the level of the late 1990s, when the Service spent more
than $3 billion annually. Capital cash outlays are budgeted to increase
to $2.4 billion in fiscal year 2004, but this level may not be
sufficient to enable the Service to fully fund its capital investment
needs. In the longer term, it is unclear what the Service's needs will
be to maintain and modernize its physical infrastructure, as well as
how these needs will be funded.
* Renewed difficulties in substantially improving postal productivity:
The Service's productivity increased by 1.8 percent in fiscal year 2003
but is estimated to increase by only 0.4 percent in fiscal year 2004.
In the absence of mail volume growth, substantial productivity
increases will be required to help cover cost increases generated by
rising wages and benefit costs and to mitigate rate increases.
* Significant financial liabilities and obligations: Despite the
passage of legislation that reduced the Service's pension obligations,
the Service has about $88 billion to $98 billion in liabilities and
obligations that include $47 billion to $57 billion in unfunded retiree
health benefits. Under the current pay-as-you go system, the Service
may have difficulty financing its retiree health benefits obligation in
the future if mail volume trends continue to impact revenues while
costs in this area continue to rise. The Service has recently proposed
two options to Congress so the Service could prefund this obligation to
the extent that it is financially able.
* Uncertain funding for emergency preparedness: The Service requested
$350 million for emergency preparedness for fiscal year 2004, which it
did not receive, and $779 million for fiscal year 2005. If the money is
not appropriated, funding for this purpose may have to be built into
postal rates.
* Challenges to achieve sufficient cost cutting: The Service achieved
additional cost cutting to compensate for below-budget revenues in
fiscal year 2003. Despite this progress, in the longer term it is
unclear whether continued cost-cutting efforts can offset declines in
First-Class Mail volume without impacting the quality of service.
In view of the Service's continuing financial, operational, and human
capital challenges, as well as trends that increase the urgency of
making rapid progress in transforming its organization, we believe that
Congress should enact comprehensive postal reform legislation that
includes the Service's overall statutory framework, resolution of
issues regarding the Service's pension and retiree health benefits
obligations, and whether there is a continued need for an escrow
account. We are pleased that the administration has engaged with
Congress and other stakeholders on these important issues, and agree
with the administration's principles for postal reform.[Footnote 3] We
also believe that the findings and recommendations of the presidential
commission's report made a valuable contribution to assist Congress,
the administration, the Service, and other stakeholders in considering
the actions needed to transform the Service to a more high-performing,
results-oriented, transparent, and accountable organization. My
testimony, based on our prior reports and testimonies[Footnote 4] and
our continuing work in this area,[Footnote 5] will address the need for
postal reform and the key areas for comprehensive postal reform,
including:
* clarifying the Service's mission and role by defining the scope of
universal service and the postal monopoly and clarifying the role of
the Service in regard to competition;
* enhancing governance, transparency, and accountability by delineating
public policy, operational, and regulatory responsibilities, as well as
defining appropriate transparency and accountability mechanisms;
* improving flexibilities and oversight by balancing increased postal
flexibility with an appropriate level of independent oversight and
addressing selected legal and other constraints that limit the
Service's ability to rationalize its infrastructure and workforce; and:
* making needed human capital reforms such as determining the Service's
responsibility for pension costs related to military service, funding
retiree health benefits, and determining what action to take on the
escrow account established in recent pension legislation, deciding
whether postal workers' compensation benefits should be on par with
those in the private sector, and clarifying pay comparability
standards.
The Need for Comprehensive Postal Reform Legislation:
Our conviction, shared by the presidential commission, the Service, the
administration, and others, is that postal reform is needed. The status
quo has not produced satisfactory results and the temporary surpluses
generated by P.L. 108-18 are unsustainable. Incremental steps toward
postal transformation cannot resolve the fundamental and systemic
issues associated with the Service's current business model. The
Service's long-term financial challenges remain, and, accordingly, the
Service's long-term outlook and transformation efforts remain on our
High-Risk List. Fundamental changes will need to be made to the
Service's business model, and the legal and regulatory framework that
supports it, to help assure the Service's long-term financial
viability. Now that the presidential commission has finished its work,
the time has come for Congress to act. Structural issues contributing
to the need for postal reform include the following:
* Uncertain financial future: The Service is intended to be self-
supporting through postal revenues. However, as the presidential
commission noted, even after recent statutory changes reduced the
Service's unfunded liability for Civil Service Retirement System (CSRS)
pension benefits, the Service has accumulated over $85 billion in
financial liabilities and obligations over the past three decades.
These liabilities and obligations include large unfunded obligations
for retiree health benefits, workers' compensation liabilities,
remaining pension obligations, and debt. Given the Service's
demographics and current health care trends, the costs and obligations
related to retiree health benefits are expected to continue rising at a
rapid rate. These growing obligations will increase financial pressure
on the Service at a time when revenues from First-Class Mail are
expected to continue to decline.
* Difficulty financing capital needs: In recent years, as the Service's
debt level neared its $15 billion cap, the Service found it problematic
to obtain adequate financing for capital needs and thus curtailed
capital spending. Recently enacted pension legislation has resulted in
an increase in cash flow, and the Service plans to increase capital
spending for fiscal year 2004. However, in the longer term, it may be
difficult for the Service to obtain adequate funds to address its
capital needs, including modernizing its aging network of postal
facilities, without significantly increasing rates or debt. An
additional potential source of funding is the disposition of surplus
real estate, because the Service is allowed by law to retain all
revenues received from the disposition of postal assets. Although the
current market value of the Service's portfolio is unknown, its book
value is approximately $15 billion.
* Limited incentives for success: The current legal framework, which
was designed to help the Service fulfill universal service mandates,
does not provide the same types of incentives that apply to the private
sector. Under the statutory break-even mandate and postal monopoly, the
Service does not have the profit motive or direct competition (in
letter mail) like the private sector does. In addition, the rate-
setting structure has allowed the Service to cover rising costs by
increasing rates. Moreover, whatever cost reductions the Service
achieves in one rate cycle are used to reset the estimated costs that
the Service is to recover in the next rate cycle, limiting incentives
for cutting costs and improving productivity. In this regard, a limited
retained earnings provision could enable the Service and its employees
to benefit from whatever cost reductions are achieved.
Despite the above, the Service has achieved success in reducing total
work hours and downsizing its workforce by over 74,000 employees over
the past 3 fiscal years, which has helped the Service contain its
costs. However, cost cutting is likely to achieve diminishing returns
under the current structure, which restricts the Service's flexibility
and provides limited incentives. Thus, postal reform is needed to
enhance incentives and enable the Service to achieve major advances in
postal productivity and continued cost reductions. Such advances may be
achieved through continuing automation as well as realignment of the
Service's processing and retail networks.
As previously noted, the likelihood of declining First-Class Mail
volume is another key impetus for postal reform. Its rate of growth has
been in long-term decline since the 1980s. First-Class Mail can be
divided into two categories that are both declining in volume: (1)
single-piece mail, such as letters, which is sent at the rate of 37
cents plus 23 cents for each additional ounce; and (2) bulk mail, which
receives discounts for worksharing activities performed by mailers (see
fig. 1). The single-piece mail includes remittance mail, which is
impacted by diversion to other forms of payment, such as automatic
deductions from bank accounts, automatic charges to credit cards, and
other electronic payments. The bulk mail includes mailings of bills and
statements, and advertising mail. Single-piece First-Class Mail volume
declined by a record 5.4 percent in fiscal year 2003, while bulk First-
Class Mail volume declined by 1 percent--the first such decline since
worksharing discounts were implemented in fiscal year 1976.
Figure 1: First-Class Mail Volume Growth, Fiscal Years 1984 through
2003:
[See PDF for image]
[End of figure]
First-Class Mail generates more than half of the Service's revenue and
covers more than two-thirds of its institutional costs. Standard Mail
volume is growing, but it makes a smaller per-piece contribution than
First-Class Mail and its volume is considered more price sensitive to
rate increases. Parcel Post volume is also growing, but not enough to
offset declines in Priority Mail. Periodicals mail is priced at cost,
and other sources of Service revenue make a relatively small
contribution to its institutional costs. Thus, the loss of contribution
from declining First-Class Mail volume is difficult to recover from
other classes of mail.
Looking ahead, a report prepared for the presidential commission found
that growth in electronic payments is likely to be an important factor
in its forecast of gradual declines in First-Class Mail
volume.[Footnote 6] The rapid diffusion of computer, Internet, and
broadband technologies has led to high adoption rates among those with
high levels of income and education--the same groups that send and
receive a disproportionate share of First-Class Mail. These trends
point to the strong potential for further diversion. Raising postal
rates to offset this trend may provide an immediate boost to the
Service's revenues, but over the longer term will likely accelerate the
transition of mailed communications and payments to electronic
alternatives, including the Internet.
If the Service's core business of First-Class Mail continues to
decline, it will face the formidable challenge of maintaining
affordable universal postal service by growing revenues, significantly
cutting costs, or reducing service standards. In order to achieve net
cost savings, the Service's cost-cutting efforts must currently offset
billions of dollars in annual cost increases for general wage
increases, cost-of-living adjustments, and rising benefits costs,
particularly in health insurance premiums, as well as infrastructure
and workforce costs associated with having to deliver mail to over 1.5
million new addresses every year. Thus, maintaining the quality and
affordability of postal services would likely require dramatic
improvement in the Service's efficiency. In order to do so, the Service
will need to become a much leaner and more flexible organization and
rightsize its processing and retail networks and its workforce.
More significant and frequent rate hikes are also likely to be needed
to cover the costs of benefits that are being earned by current
employees and financed under existing cash-based accounting and rate-
setting methods. One of the key reform challenges facing Congress and
the Service is the funding of the Service's financial liabilities and
obligations, including unfunded retiree health benefits, workers'
compensation benefits, and Civil Service Retirement System (CSRS)
pension obligations. Although recent legislation addressed how the
Service will cover its CSRS pension obligations over a 40-year period,
the Service continues to make minimum payments for the other
obligations, which are currently financed on a pay-as-you go basis.
Based on known demographic trends, the Service's payments on its
retirees' health insurance premiums are expected to continue rising
until about 2040.
Congress is currently reviewing the Service's retirement-related
obligations. We believe that it would be prudent for the Service to
address the unfunded obligations today, in a manner that is fair and
balanced for both current and future ratepayers. In response to the
requirement in the Postal Civil Service Retirement System Funding
Reform Act of 2003 (P.L.108-18) that the Service report on how it
proposes to use the pension "savings" resulting from the act, the
Service proposed to prefund at least a portion of its retiree health
benefits obligation. We found that although this proposal would result
in marginally higher postal rate increases, at least in the short term,
it strikes a reasonable and equitable balance between current and
future ratepayers, and addressed one of the Service's substantial
future obligations. On a related matter, we recommended that Congress
repeal the escrow requirement established by P.L. 108-18 after
receiving an acceptable plan from the Service describing how it intends
to rationalize its infrastructure and workforce and is confident that
the Service is making satisfactory progress on transforming itself into
a more efficient organization and implementing its other transformation
goals.[Footnote 7] This recommendation and related considerations,
including responsibility for military service pension costs, are
discussed further in this statement. Taken together, consideration of
the escrow requirement, postal reform, and the Service's retiree health
benefits obligation represents a rare opportunity to address the
Service's long-term financial viability.
Major Elements Needed for Comprehensive Postal Reform:
We and the presidential commission have reported that universal postal
service is at risk and that reform is needed to minimize the risk of a
significant taxpayer bailout or dramatic and more frequent postal rate
increases. We have testified that Congress should enact comprehensive
postal reform legislation that would clarify the Service's mission and
role; enhance its governance, transparency, and accountability; balance
enhanced flexibility and oversight to improve regulation of postal
rates; help to ensure the rationalization of the Service's
infrastructure and workforce; and make needed human capital reforms.
The administration has also supported postal reform and outlined
guiding principles to ensure that the Service: implements best
practices with a governing body equipped to meet the responsibilities
and objectives of an enterprise of its size and scope; enhances
transparency of timely and accurate data on postal costs and
performance; provides greater flexibility for the Service to meet its
obligations to customers in a dynamic marketplace; ensures additional
accountability through appropriate independent oversight; and keeps the
Service financially self-sufficient, covering all of its obligations.
In the following sections of this testimony, I discuss comprehensive
postal reform in light of these principles.
Postal Service Mission and Role Need Clarification:
It is important for Congress to consider how best to clarify the
mission and role of the Postal Service as part of a fundamental
reexamination of the role of the federal government in the 21st
century. As the presidential commission recognized, the nation's postal
laws that established the Service in the early 1970s did not envision
the challenge of setting appropriate boundaries on the Service's
commercial activities and maintaining fair competition between the
Service and the private sector. These issues need to be addressed
because the Service has repeatedly strayed from its core mission. We
have reported on the Service's money-losing initiatives in electronic
commerce and remittance processing, among other things.[Footnote 8] The
Service's ill-fated ventures were also questioned by some postal
stakeholders as unfair competition, since they were cross-subsidized by
a tax-exempt entity that is also exempt from many laws and regulations
governing the private sector. Further, such ventures have raised the
fundamental issue of why the federal government is becoming involved in
areas that are well served by the private sector. Although the current
Postmaster General has appropriately focused on the Service's core
business of delivering the mail and sharply curtailed its nonpostal
initiatives, the presidential commission recommended codifying this
policy. In our view, the time has come for Congress to clarify the
Service's core mission and ensure continuity across changes in postal
management. Key questions in this area include the following:
* How should universal postal service be defined in the 21st century?
* Should the Service be allowed to compete in areas where there are
private-sector providers? If so, in what areas and on what terms? What
laws should be applied equally to the Service and to its competitors?
* Should the Service's competitive products and services be subject to
antitrust and general competition-related laws? Should they be subject
to consumer protection laws?
* Should the Service retain its regulatory responsibilities and law
enforcement functions?
On a related issue, the Service's current statutory monopoly on the
delivery of letter mail and its monopoly over access to mailboxes have
historically been justified as necessary for the preservation of
universal service.[Footnote 9] However, questions have been raised
regarding whether these restrictions continue to be needed; and if so,
to what extent and whether the Service should be able to define their
scope. Narrowing or eliminating the monopoly could increase consumer
choice and provide incentives for the Service to become more effective
and efficient. For example, in the competitive parcel market, FedEx has
expanded its role in delivering residential parcels and UPS has
shortened its guaranteed transit time on ground shipments traveling to
some of the country's biggest metropolitan areas.
Another issue is whether the Service, as a commercial competitor in the
overnight and parcel delivery markets, should have the authority to
regulate the scope of competition in these areas.[Footnote 10] The
presidential commission has recommended separating these functions so
that the Postal Service cannot define and regulate the scope of its own
monopoly. As the presidential commission noted, it is a fundamental
premise of American justice that parties that administer laws should
not have a financial interest in the outcome. Questions relating to the
postal monopoly include the following:
* Is a government monopoly needed to enable affordable universal postal
service, especially if such service is provided at uniform rates? If
so, what scope of monopoly is needed?
* Should the Service continue to have the power to define and regulate
its own statutory monopoly, including use of the suspension process?
* Should a regulatory body have authority to redefine and narrow the
postal monopoly and the mailbox monopoly? If so, should a clear
statement of congressional intent be provided to guide regulatory
decisions, or should the regulator have unfettered discretion to
consider options to expand or contract the Service's monopoly? What
principles should guide the process, and what key players should be
involved?
* Similarly, should the regulator be able to consider opening up access
to the mailbox? If so, under what circumstances? Would it be cost
effective for private delivery companies to deliver items to mailboxes
if individuals could veto access and redefine mailbox access as the
delivery companies move from one home to another?
* Should any regulatory decisions be governed by process requirements
to enable stakeholder input? Should such processes facilitate
congressional review of any changes, as is the case for some other
types of communications regulated by the federal government?
The Need for Enhanced Governance, Transparency, and Accountability
Mechanisms:
In our view, the Service must have greater flexibility to operate in a
businesslike fashion, but with this latitude comes the need for
enhanced governance, transparency, and accountability mechanisms.
Managerial accountability must come from the top, with the Service
governed by a strong, well-qualified corporate-style board that holds
its officers responsible and accountable for achieving real results
both currently and over time. In addition, despite recent improvements,
we continue to be concerned that additional transparency mechanisms be
implemented to enhance the Service's accountability for financial and
performance results.
Governance Issues:
If the Service is to successfully operate in a more competitive
environment, the role and structure of a private-sector board of
directors may be an appropriate guide for governance. Having a well
qualified, independent, adequately resourced, and accountable board is
critical for a major federal institution with annual revenues
approaching $70 billion and almost 830,000 employees at the end of
fiscal year 2003. We agree with the presidential commission that the
Service's legacy governance structure is increasingly at odds with its
mission in the modern environment and that the Service's governing
structure needs to consist of members with the requisite knowledge and
experience. In this regard, one issue is what statutory qualification
requirements are appropriate for the board to ensure that it has the
kind of expertise necessary to oversee a major government business.
Another major issue is whether the Service should be held more directly
accountable for its performance, and if so, to what extent, to whom,
and with what mechanisms. Specifically, how should the Service's
governing board, along with top management, be held accountable? The
presidential commission recommended that the Postal Rate Commission
(PRC) be replaced with a newly created regulatory board endowed with
broad public policy responsibilities as well as broad mandates and
authority for accountability and oversight. These recommendations raise
fundamental questions, including the following:
* Who should make certain public policy decisions regarding the Postal
Service--the Service, an independent regulator, or Congress?
* What accountability should apply to a monopoly provider of vital
postal services that also is a major competitor in the communications
and delivery marketplace?
* How should the Service be held accountable if it remains an
independent establishment of the executive branch?
* To what extent can the Service be accountable to Congress and the
executive branch without being subject to undue political control?
* To what extent should a regulatory body exercise accountability? For
what purpose? With what authority? How should it be structured to
preserve its independence from political manipulation and minimize the
risk of regulatory capture?
* What statutory guidance and constraints should apply to regulatory
actions, including due process and recourse to judicial and/or
congressional review?
Enhancing Transparency and Accountability of Financial and Performance
Information:
A key element of postal reform will be the statutory reporting
requirements needed to ensure transparency and accountability of
financial and performance information. The Service remains a public
institution with a monopoly on providing vital postal services to the
nation. Hence, appropriate transparency is needed so that stakeholders
are well apprised of the Service's financial situation and performance
and understand how future results may be affected by impending events,
so that changes do not come as a surprise to those responsible for or
impacted by its performance.
The Service has made recent progress in this area, but it recognizes
that further progress should be made. Enhanced transparency will be
essential for stakeholders to better understand the Service's financial
situation and performance results, conduct independent oversight, and
hold management accountable.[Footnote 11] In addition, enhanced
reporting will be even more critical if the Service obtains greater
flexibility to set postal rates in a streamlined manner that relies on
rapid verification of compliance. A key issue is whether statutory
change is needed to enhance the level of transparency that the Service
must provide. We were pleased the Service has recently taken steps to
enhance its financial reporting. The Chairman of the Service's Board of
Governors also recently indicated that the Service would make further
enhancements along the lines of some SEC reporting requirements. In our
view, it will be important for Congress to obtain clarification from
the Service on how and when it intends to develop financial statements
and disclosures comparable to those provided by publicly traded
companies. If Congress determines that the Service's proposed approach
is not acceptable or timely, or if the Service does not fulfill the
commitment it makes in this regard, Congress could consider mandating
SEC-type reporting requirements for the Service, or giving a regulatory
body authority in this area.
In addition, there are areas where stakeholders still have little
information, such as the Service's financial needs for maintaining and
modernizing its infrastructure, and the true market value of the
Service's vast real estate holdings. Further, we continue to be
concerned that the Service does not communicate its delivery
performance for all of its major mail categories, particularly those
covered by its monopoly. The Service's customers have a right to know
what they are getting for their money, particularly captive customers
with few or no alternatives to using the mail. Information about
service quality would become even more important if the Service obtains
more flexibility and incentives to cut its costs. Accordingly, the
presidential commission recommended that a regulatory body be required
to prepare a comprehensive annual report assessing the Service's
performance in meeting established service standards. If such a report
is to be meaningful, the regulator may also need authority to require
the Service to collect service performance data.
Key questions related to transparency and accountability include the
following:
* What transparency of the Service's financial and performance results
is appropriate for oversight and accountability? What mechanisms should
be established to facilitate and ensure adequate transparency?
* What transparency and accountability mechanisms are needed to prevent
unfair competition and inappropriate cross-subsidization?
* Should the Service comply, either on a voluntary basis or through a
statutory requirement, with major Securities and Exchange Commission
(SEC) reporting requirements?
Flexibilities and Independent Oversight:
Giving the Service greater flexibility to operate in a businesslike
manner also would require enhanced oversight by an independent
regulatory body endowed with sufficient authority and resources, as
well as continued congressional oversight. Current law mandates
independent review of postal rates and has the laudable goals of
protecting postal customers against undue discrimination, restricting
cross-subsidies, and ensuring due process. However, the current rate-
setting structure is adversarial, lengthy and expensive. It also serves
to significantly limit the Service's rate-setting flexibility while
providing poor incentives for appropriate cost allocation. In addition,
the Postal Rate Commission (PRC) has limited authority, particularly in
the areas of cost allocation and ensuring the quality of the supporting
data. Improvements in the rate-setting area will be a fundamental
component of postal reform legislation. Furthermore, the Service faces
legal and other constraints that limit its flexibility to rationalize
its infrastructure and workforce. Legislative reforms are needed in
this area as well.
More Flexibility and Enhanced Oversight Needed in Rate-Setting Area:
As long as the Service remains a federal entity protected by the postal
monopoly, its ability to compete with the private sector should be
balanced with appropriate oversight and adequate legal standards to
ensure fair competition between the Service and private competitors.
Clear lines of authority in this area must be established if the rate-
setting process is to be streamlined and sped up. A key issue for
Congress to consider is the appropriate balance between flexibility and
accountability. Another issue is what due process rules should be
established in order to enable stakeholders to provide meaningful input
and participate in rate-setting matters, including the right to appeal
regulatory decisions. Key shortcomings of the current rate-setting
structure include the following:
* Adversarial, burdensome, and lengthy rate-setting proceedings.
Statutory requirements for rate and classification cases impose a
litigious, costly, and lengthy rate-setting process that can delay
needed new revenues by more than a year. Because the law enables any
interested party to participate, most changes require a major
proceeding that places the Service in an adversarial relationship with
its major customers and at a distinct competitive disadvantage. Rate
cases tend to pit the Service and postal stakeholders against each
other, since the zero-sum nature of the break-even requirement provides
powerful incentives for parties to attempt to shift postal costs in
ways that serve their self-interests. The Service and other
stakeholders report spending millions of dollars in each rate case on
attorneys, economists, statisticians, and other postal experts who pore
over many thousands of pages of testimony, interrogatories, and
rebuttals. The high cost of participation, coupled with the increasing
complexity of rate-setting data and methods, makes it difficult for
smaller stakeholders to effectively participate. Statutory rules
against ex parte communications help to preserve due process and
fairness, but also make it difficult for experts to constructively
discuss technical issues and resolve problems as they arise.
* Unresolved, recurring disputes. The current rate-setting structure,
which seeks to assure all parties due process, enables them to
repeatedly raise issues that have previously been considered. The
Service has a unique opportunity to repeatedly raise issues by building
them into its initial rate proposals. For many years, cost allocation
issues have been debated and are frequently a key reason why rate cases
are so lengthy and litigious, since their disposition can directly
affect rates. Although interested parties should have an opportunity to
participate in rate cases, the need to address complex cost allocations
in every rate proceeding is inconsistent with having a streamlined
rate-setting process that swiftly resolves complaints about rates.
* Poor incentives for data quality. Current law gives the Service
opportunities to seek advantage in litigious rate cases through its
control over what data are collected and how those data are analyzed
and reported. PRC cannot compel the Service to collect data, update
data, or subpoena information. The 1999 Data Quality Study, which you
requested, Mr. Chairman, found that key postal cost data had not been
updated for many years and were used regardless of their
obsolescence.[Footnote 12] Although the Service has worked to address
these and other deficiencies identified by the study, it is fair to
question why these problems could linger for so long.
* Disincentives for maximizing cost allocation. Under current law, all
classes of mail and types of service must cover their attributable
costs, while institutional costs are allocated based on judgment
informed by broad statutory criteria.[Footnote 13] In effect, the
Service loses pricing flexibility as costs are allocated to specific
postal products and services, creating a structural disincentive to
allocate costs. The presidential commission's conclusion that more
postal costs can and should be allocated raises the issue of whether
more regulatory authority is needed to ensure that all costs that can
be rationally attributed are properly allocated.
* Need for Periodic Reporting. As the presidential commission noted,
independent regulatory oversight should ensure that the outcome cannot
be unduly influenced through the selective provision of information to
the regulator. To this end, a key issue is whether the law should
mandate the Service to submit periodic reports in accordance with form,
content, and timing requirements determined by a regulatory body. This
could involve changing the statute to clarify that the regulator could
compel the collection and provision of necessary data, including rate-
setting and performance information, that would be analyzed according
to cost allocation methods determined by the regulator.
Worksharing discounts:
A particularly controversial area includes consideration of worksharing
discounts, which are applicable to about three-quarters of the
Service's mail volume. Worksharing discounts did not exist when the
Postal Reorganization Act of 1970 was enacted. Thus, there is little
statutory guidance in this area except for the mandate for the PRC to
consider--along with other factors--the degree of preparation of mail
for delivery into the postal system performed by the mailer and its
effect upon reducing costs to the Service.[Footnote 14] Over time, the
PRC developed a guideline for recommending worksharing discounts so
that the estimated reduction in Service revenues would be no more than
equal to the estimated reduction in related Service costs. Because
worksharing discounts have become an integral part of the rate-setting
structure, a key issue is whether statutory guidance would be
appropriate in this area, and if so, whether hard-and-fast rules versus
a set of key principles or criteria for worksharing discounts should be
established in law. Other issues and questions that have been raised in
the rate-setting area include the following:
* Should the break-even mandate continue to govern the postal rate-
setting process, or should the Service be allowed to retain a certain
amount of earnings?
* Is after-the-fact rate review incompatible with the need to ensure
fair competition by an organization that can leverage the revenues and
infrastructure obtained through its monopoly on delivering letter mail?
If not, should measures be taken to limit the potential for unfair
competition, such as providing limitations on the introduction of
subsidized new products and services? Should a regulatory body be
authorized to order the discontinuance of postal products and services
that consistently fail to cover their costs?
* Could a complaint process, as a key mechanism to seek redress for
rates established with no prior review, create an incentive for
numerous complaints that could become a de facto review of virtually
all rates? Even if a regulatory body could order changes in rates after
the fact, would it be reluctant to do so, given the potential financial
impact and disruption for the Service and the mailing industry?
* How much time is needed for meaningful after-the-fact review of
changes in postage rates and review of complaints? What due process
rules should be established for stakeholder participation in rate
complaints and other rate-setting matters?
* What process should govern regulatory decisions regarding the
measurement, allocation, and reporting of postal costs and revenues?
Should the regulatory body also be given the authority to compel the
Service to collect data, as some have suggested?
* If mailer-specific discounts are authorized, should data be required
on the mailer-specific cost savings that the Service expects to
achieve? If so, how should the regulatory body balance its needs for
such information with limitations relating to the practicality and
burden of producing it?
* What statutory criteria should govern the adoption and review of
negotiated service agreements (NSA)? Could NSAs create competitive
harm, and, if so, what measures should be taken to mitigate this risk
(e.g., prior review and other limitations)?
* Would a transition period be needed to successfully implement a
different rate-setting system and address major unresolved cost
allocation issues, as well as for the Service to improve its cost
allocation methods and underlying information systems that provide
costing data?
Price-cap regulation:
As the above discussion demonstrates, the need for changing the postal
rate-setting structure is clear. However, many questions remain about
what changes should be made and the potential problems associated with
those changes. Specifically, the option of adopting a price-cap model
for regulating postal rates has emerged as a main alternative to a
cost-of-service regulatory model but raises many issues that deserve
thoughtful consideration.[Footnote 15] By its very nature, any
fundamental change to the rate-setting system would necessarily entail
substantial uncertainty, risks, and the possibility for further change
to deal with unanticipated consequences. In this regard, the benefits
and risks of adopting a price-cap system need to be weighed against the
benefits and risks of the status quo. If the Service is to be limited
to its core mission, the flexibility provided by a price-cap system
could become a key tool to successfully managing the transition to a
leaner, more efficient postal system. A price-cap system also could
enable the Service to implement a strategy of smaller, more frequent
changes in postal rates, as opposed to a strategy of more infrequent,
yet significant increases. We recognize that these proposals have been
reviewed in numerous hearings, surfacing many issues and creating a
valuable record to build on. Key questions to consider include the
following:
* Would a price-cap system provide the intended incentives for the
Service to maximize its financial performance, since it is a public
institution that is not accountable to shareholders who hold stock and
demand management accountability?
* Would a price cap provide incentives for the Service to reduce the
quality of service for captive customers? If so, what transparency and
accountability mechanisms would be needed to ensure the quality of
universal postal service?
* Could the Service use its flexibility to raise rates within the price
cap to unfairly shift the burden of institutional costs away from
competitive products and services and onto its most captive customers?
* Should the law require that rates for each class of mail or type of
service cover the direct and indirect postal costs attributable to
them? If so, at what level (e.g., mail class, subclass, rate category,
etc.)?
* Could the Service generate sufficient revenues if its rates were
constrained by a price cap? If not, under what circumstances, if any,
should the Service be authorized to raise rates in excess of the cap?
How can ratepayers be assured that it would not be too easy for the
Service to obtain such increases, which would vitiate the intent of the
price cap? What process should apply to such "exigent" rate increases?
* Would a price cap restrain the growth of wages and benefits for
postal employees? If so, to what extent and would such a result be
desirable?
* How would a price-cap system affect historic preferences that have
been provided to certain mailers, such as mailers of nonprofit mail,
periodicals, and library mail?
* How could the Service redesign the rate and classification system, as
it did through the 1995 reclassification case, if it were subject to a
price cap? How could more limited classification changes be adopted?
* Would adopting a price-cap system be too risky, given problems that
have surfaced in some price-cap models adopted by other regulated
industries? How could flexibility be built into the system to minimize
risk and handle "the law of unintended consequences?":
* Should Congress specify provisions of a price-cap system? If so, what
features should be codified in statute and which should be left to the
regulatory process?
* What issues should be considered in adapting price-cap regulation
from other industries and foreign postal systems to the unique context
of regulating postal rates in the United States?
* What transition features should be required, such as a "baseline"
rate case, in order to successfully implement a price-cap system?
* What other regulatory models should be considered in the rate-setting
area?
Constraints to Flexibility of the Service's Operations and
Infrastructure:
The Service's uncertain future regarding its mail volume and revenue
growth makes it imperative for the Service to become a more cost-
effective and efficient organization. To facilitate this, the Service's
governing body and management must have the authority and flexibility
to reduce costs and modify its business operations. There are a number
of inefficiencies in the Service's current infrastructure, which has
evolved piecemeal over decades and may not adequately reflect current
and future needs. This infrastructure includes approximately 38,000
post offices, stations, and branches; 500 mail processing and
distribution facilities; and other facilities. On the retail side, many
post office transactions, like selling stamps, can be conducted more
efficiently through other retail alternatives. On the processing and
distribution side, efficiency varies across facilities, in part because
the Service does not have standardized operations.
Although the Service recognizes the need to rationalize its
infrastructure, several current legal constraints hinder its
flexibility. A key question for Congress to consider is whether current
legal restrictions on closing post offices should be retained,
modified, or repealed. Under current law, the Service is not allowed to
close post offices for economic reasons alone.[Footnote 16] In making a
determination on whether to close or consolidate a post office, the
Service is required to consider the effect on the community, postal
employees at that office, and the resulting economic savings, among
other things.[Footnote 17] All post office closings are also subject to
a statutory process that governs notification and appeals, which can
delay closings for an extended period.[Footnote 18] In addition, annual
appropriations bills have long specified that no appropriated funds
shall be used to consolidate or close small rural and other small post
offices.
Regulations further specify processes that the Service must follow for
closing, consolidating, and relocating post offices. The Service can
also suspend post office operations in an emergency without following
the normal procedures but must notify affected customers individually
and establish alternative services as quickly as possible. While there
are no statutory regulations against closing mail processing and
distribution facilities, these facilities are often co-located with
post offices that are subject to statutory constraints. In addition,
the Service often encounters political resistance when it determines to
close, consolidate, or relocate postal facilities. Government officials
are understandably concerned about decisions that affect customers,
postal employees, as well as communities and constituents. In any
event, it will be important for the Service to communicate with and
consider the concerns of those affected by facility closings or other
changes.
Greater flexibility for the Service to reshape its infrastructure must
be accompanied by enhanced transparency and accountability mechanisms.
Because rationalizing its infrastructure and workforce is crucial to
the Service's future financial viability and has potentially broad
impacts, we recommended that the Service prepare a publicly available
plan that lays out its vision and strategies in this area.[Footnote 19]
This plan should include the key principles or criteria that will guide
the Service's decisions, the processes that will be used to make its
decisions, and the players that will be involved. We have also
recommended that repeal of the escrow requirement be contingent on
Congress's receipt of a satisfactory plan from the Service describing
how it intends to rationalize its infrastructure and
workforce.[Footnote 20] Both the House and Senate oversight committees
have sent letters to the Postmaster General requesting the Service to
provide Congress with a plan for rationalizing the Service's
infrastructure and workforce. Service officials told us that they are
in the process of developing the requested plan and intend to provide
it to Congress by February 2.
Human Capital Issues:
The Postal Service's human capital is critical to providing vital
postal services to the American people and achieving a successful
postal transformation. The Service employed almost 830,000 people at
the end of fiscal year 2003, whose pay and benefits accounted for more
than three-quarters of the Service's expenses. The Service reported
that its operating expenses fell by about $1.3 billion in fiscal year
2003 due primarily to pension reform and work hour reductions. Another
area where the Service continues to make encouraging progress is in the
declining number of total grievances, which as of the end of fiscal
year 2003 had fallen to 93,483, less than half the number at the end of
fiscal year 1998. Further progress on controlling human capital costs
will be critical to sustain both affordable and universal postal
service. The Service's hourly compensation costs, including wages and
benefits, are rising faster than inflation, and key issues remain
unresolved regarding the Service's pension and retiree health benefits
obligations. We believe that the time is right to consider what
statutory structure would be appropriate to address these issues,
facilitate best practices, and improve labor-management relations and
overall working conditions. In this section of my statement, I will
focus on (1) funding of pension and retiree health benefits
obligations; (2) workers' compensation provisions; and (3) criteria for
pay comparability.
Postal Pension and Retiree Health Benefits Issues:
The Service's substantial obligations for its retirement-related
benefits need to be addressed, especially in connection with its
retiree health benefits. A key issue is how to assign responsibility
and structure a mechanism for covering the costs of providing
retirement-related benefits. Another issue is how changes in funding
these obligations could affect postal ratepayers, taxpayers, and the
federal budget.
The Postal Civil Service Retirement System Funding Reform Act of 2003
(P.L. 108-18), enacted in April 2003, changed the method by which the
Service funds the Civil Service Retirement System (CSRS) pension
benefits of its current and former employees to prevent a projected
overfunding from materializing. At the same time, the act shifted
responsibility for funding pension benefits attributable to military
service from taxpayers to postal ratepayers. The act required that,
beginning in fiscal year 2006, the difference between the Service's
contributions under the new and old funding methods--the "savings"--be
held in an escrow account until the law is changed. To facilitate
consideration of which agency--the Postal Service or the Treasury
Department--should fund military service pension costs, the act
required the Service, the Office of Personnel Management (OPM), and the
Treasury Department to each submit proposals to the President,
Congress, and the GAO by September 30, 2003. The act also required the
Service to submit a proposal to the same recipients on how it planned
to use the future "savings." We, in turn, provided our analysis of
these proposals on November 26, 2003.[Footnote 21]
Regarding the military service issue, the Service believes that the
Treasury should bear responsibility for pension costs related to
military service, while Treasury and OPM believe that this
responsibility should remain with the Service. We do not take a
position on whether the Service or the Treasury should bear
responsibility for the military service costs, because we believe that
this is a policy decision that should be made by Congress. Instead, we
have identified and assessed the agencies' respective positions and
provided additional information to assist Congress in making its
decision. In this regard, two key issues were raised by the agencies,
with differing views provided--(1) the relationship of military service
to employing agencies' operations and (2) consistency among agencies,
especially self-supporting ones. Regarding the first issue, the Service
believes that there is no relationship between military service and
postal operations and therefore the Service should not bear the pension
costs related to military service. Treasury's view is that the
employing agencies should bear this cost, because receiving credit for
past military service is a civilian retirement benefit. Absent a
conscious, voluntary, and contractual decision to the contrary, typical
cost attribution methods would allocate service to the agency that
benefited from the military service (Department of Defense). Under such
a method, the taxpayers would bear the cost of pensions related to
military service.
Regarding consistency, we reported that the Service is required to fund
the dynamic normal cost of CSRS benefits, whereas some self-supporting
agencies pay only a portion of this cost. Thus, we stated in our
Matters for Congressional Consideration that Congress should consider
treating all self-supporting entities consistently by requiring dynamic
funding of the full cost of pension benefit costs not paid by employee
contributions and deposits exclusive of military service costs. We also
recommended that Congress should consider requiring consistency across
self-supporting agencies in assigning responsibility for pension costs
related to military service.
Should Congress decide that the Service should retain responsibility
for funding military service pension benefits, the appropriate method
for allocating the cost of these benefits would need to be decided. In
this regard, we recommended in our report that an additional option
should be explored for allocating these costs. Specifically, one that
makes the Service responsible only for military service that became
creditable after postal reorganization took effect on July 1,
1971.[Footnote 22]
The second issue that Congress must consider is the Postal Service's
report on use of the pension "savings." The Service submitted two
proposals, both of which would affect postal rates to varying degrees.
The first proposal recommends that the Service be relieved of the
burden of funding pension benefits attributable to military service,
and that the Service, in turn, would begin to prefund its retiree
health benefits obligation for current and former employees, which has
been estimated in fiscal year 2003 at between $47 billion and $57
billion. The second proposal is based on the premise that the Service
will remain responsible for funding military service benefits as
currently required by P.L. 108-18. Under this proposal, the Service
said that it would fund its retiree health benefits obligation only for
employees hired after fiscal year 2002 and use the remaining "savings"
to repay debt and to fund productivity and cost-saving capital
investments. In our report, we noted that if either of these proposals
were accepted, Congress would need to address implementation issues
related to prefunding the retiree health benefits obligation, including
who determines the amount of the obligation, what demographic and
economic assumptions should be reflected in the obligation amount, and
what funding and investment approach should be used.
We assessed these proposals according to their fairness and
affordability and how they addressed the Service's transformation
efforts, including its cost saving and productivity improvement
initiatives. We found that the first proposal strikes a more equitable
balance of allocating costs between current and future ratepayers
because benefits being earned by today's employees would be built into
the current postal rate base. Under the second proposal, a substantial
portion of the retiree health benefits obligation would remain
unfunded, thereby placing the burden of the retiree health benefits
being earned today on future ratepayers. Both of the proposals
attempted to balance short-term rate mitigation with some level of
prefunding of the Service's retirement health benefits obligation. In
its first proposal, the Service estimated that an additional rate
increase of 2 percent over the rate of inflation would be required in
fiscal year 2006. The Service's second proposal would require only an
additional increase of 0.3 percent over the rate of inflation since it
would be funding a smaller portion of the retiree health benefits
obligation. To mitigate the impact of any marginally higher rates
needed to prefund retiree health benefits, we believe that the Service
must transform itself into a more efficient and effective organization
through continued modernization efforts.
Another matter we considered in evaluating the Service's proposals was
the impact of the escrow requirement embodied in P.L. 108-18, which we
determined could lead to unnecessary rate increases. However, we
reported that Congress would need to have sufficient information to
determine that the Service is making progress in achieving its
transformation goals, including its initiatives to rationalize its
infrastructure and workforce. Therefore, we recommended that Congress
should repeal the escrow requirement upon receipt from the Service of
an acceptable plan for rationalizing its infrastructure and workforce.
Both the House and Senate oversight committees subsequently requested
that the Service provide a plan on how it intends to rationalize its
infrastructure and workforce, and the Service agreed to provide such a
plan.
Workers' Compensation Issues:
Another benefit area where postal costs have been difficult to control
involves the Service's workers' compensation benefits under the Federal
Employees' Compensation Act (FECA). The Service reported nearly $1.5
billion in workers' compensation expense in fiscal year 2003, only $50
million less than the record set in the previous fiscal year, while its
unfunded liability for workers' compensation rose $526 million to a
record $7.2 billion at the end of the fiscal year. We have reported on
FECA issues, including how these benefits compare with those of other
federal and state workers' compensation laws and possible changes to
FECA benefits for beneficiaries at or beyond retirement age.[Footnote
23] We reported that to help address FECA-related cost issues, Congress
could consider converting from the current FECA benefit structure to a
FECA annuity. The presidential commission concluded that the Service
should be provided relief from FECA provisions creating costly
unintended consequences and that its workers' compensation program
should be made more comparable to programs in the private sector. For
example, the commission noted that unlike most private sector plans,
FECA imposes no waiting period before benefits begin. The commission
also pointed out that there is no maximum dollar cap on FECA payments,
so that employees eligible for retirement often opt to stay on the FECA
rolls rather than retiring. The current approach is costly and provides
certain perverse incentives. As a result, we believe that placing
workers' compensation benefits on a par with those in the private
sector merits careful consideration.
Pay Comparability Issues:
The most thorny issue in collective bargaining today is pay and benefit
comparability. Although the parties disagree about whether a wage and
benefit premium exists and about the basis for making these
comparisons, the Service's ability to control costs in this area will
be critical to achieving a financially viable organization that can
maintain affordable postal rates. One of the limitations in the
existing collective bargaining process is that the interests of postal
ratepayers do not appear to have been sufficiently considered. One
option recommended by the presidential commission was to amend the law
to mandate that a regulatory body clarify the term "comparability." In
our view, Congress could revisit the statutory comparability standard
so that it would more fully reflect the ratepayers' interests and the
Service's overall financial condition and outlook. Comparability could
be specified to include total wage, compensation, and benefit costs, as
well as the relationship of these costs to total costs, their impact on
rates and revenues, and the Service's overall financial condition.
Some key questions related to the human capital area include the
following:
* Should postal ratepayers or taxpayers pay for postal pension benefits
attributable to military service of postal workers? Should this issue
be resolved in a consistent manner for the Postal Service and other
federal agencies that are also self-supporting?
* Should postal retiree health benefits be prefunded rather than paid
on a pay-as-you go basis, and if so, to what extent? Should this issue
be resolved in statute or delegated to an administrative or regulatory
process?
* Should workers' compensation benefits for Service employees be
greater than those generally available to private sector employees?
What other opportunities exist to provide incentives to minimize
workers' compensation costs?
* Should existing statutory standards for comparability of postal wages
and benefits be clarified to include specific performance criteria and
factors upon which a comparison must be made, such as the Service's
overall financial condition and outlook? If comparability standards are
retained, what mechanisms should be required for independent reporting
and oversight?
* Should the statutory pay cap on postal executives be lifted, and if
so, how would executive pay be linked to performance? Should additional
disclosure and/or independent reviews be mandated in this area?
Chairman McHugh, that concludes my prepared statement. I would be
pleased to respond to any questions that you or the Members of the
Special Panel may have.
Contact and Acknowledgments:
For further information regarding this testimony, please contact Mark
L. Goldstein, Director, Physical Infrastructure Issues, at (202) 512-
2834 or at goldsteinm@gao.gov; or Linda Calbom, Director, Financial
Management and Assurance, at (202) 512-8341 or at calboml@gao.gov for
pension and retiree health issues. Individuals making key contributions
to this testimony included Teresa Anderson, Alan Belkin, Margaret
Cigno, Kathleen A. Gilhooly, Kenneth E. John, and Scott McNulty.
FOOTNOTES
[1] The Postal Civil Service Retirement System Funding Reform Act of
2003, Pub. L. No. 108-18, 117 Stat. 624.
[2] President's Commission on the United States Postal Service,
Embracing the Future: Making the Tough Choices to Preserve Universal
Mail Service (Washington, D.C.: July 31, 2003).
[3] http://www.treas.gov/press/releases/js1044.htm.
[4] U.S. General Accounting Office, U.S. Postal Service: Bold Action
Needed to Continue Progress on Postal Transformation, GAO-04-108T
(Washington, D.C.: Nov. 5, 2003); U.S. Postal Service: Key Postal
Transformation Issues, GAO-03-812T (Washington, D.C.: May 29, 2003);
Major Management Challenges and Program Risks: U.S. Postal Service,
GAO-03-118 (Washington, D.C.: January 2003); U.S. Postal Service:
Moving Forward on Financial and Transformation Challenges, GAO-02-694T
(Washington, D.C.: May 13, 2002); U.S. Postal Service: Deteriorating
Financial Outlook Increases Need for Transformation, GAO-02-355
(Washington, D.C.: Feb. 28, 2002); U.S. Postal Service: Financial
Outlook and Transformation Challenge; GAO-01-733T (Washington, D.C.:
May 15, 2001); and U.S. Postal Service: Transformation Challenges
Present Significant Risks, GAO-01-598T (Washington, D.C.: Apr. 4,
2001).
[5] We did not independently verify any Postal Service data, although
data from its financial statements were audited by an independent
auditor. Some other data, such as data on mail volumes and costs, were
produced by data systems that have been reviewed by the Postal Rate
Commission, by stakeholders participating in rate cases, and by the
1999 Data Quality Study. See A.T. Kearney, Data Quality Study
(Alexandria, Virginia: Apr. 16, 1999).
[6] Institute for the Future, Two Scenarios of Future Mail Volumes:
2003-2017, prepared for the President's Commission on the United States
Postal Service (Palo Alto, California: May 2003).
[7] U.S. General Accounting Office, Postal Pension Funding Reform:
Issues Related to the Postal Service's Proposed Use of Pension Savings,
GAO-04-238 (Washington, D.C.: Nov. 26, 2003).
[8] U.S. General Accounting Office, U.S. Postal Service: Update on E-
Commerce Activities and Privacy Protections, GAO-02-79 (Washington,
D.C.: Dec. 21, 2001); U.S. Postal Service: Postal Activities and Laws
Related to Electronic Commerce, GAO/GGD-00-188 (Washington, D.C.: Sept.
7, 2000); and U.S. Postal Service: Development and Inventory of New
Products, GAO/GGD-99-15 (Washington, D.C.: Nov. 24, 1998).
[9] U.S. General Accounting Office, U.S. Postal Service: Information
about Restrictions on Mailbox Access, GAO/GGD-97-85 (Washington, D.C.:
May 30, 1997).
[10] The Service has used its regulatory power to further define the
scope of the statutory monopoly by suspending the monopoly for urgent
letters and outbound international mail. The Service has also defined
the scope of its monopoly by issuing regulations that define a "letter"
for the purposes of enforcing the statute (39 C.F.R. § 310.1(a)) as
well as regulations specifying access to mailboxes (Domestic Mail
Manual, D041 and P011.2.2).
[11] U.S. General Accounting Office, U.S. Postal Service Actions to
Improve Its Financial Reporting, GAO-03-26R (Washington, D.C.: Nov. 13,
2002); and U.S. Postal Service: Enhancements Needed in Performance
Planning and Reporting, GAO-00-207 (Washington, D.C.: Sept. 19, 2000).
[12] A.T. Kearney, Data Quality Study (Alexandria, Virginia: Apr. 16,
1999).
[13] The Service proposes domestic postage rates and fees, as required
in law, so that each class of mail or type of service must cover the
direct and indirect postal costs that are attributable to that class or
type of service plus a portion of its institutional costs. This
requirement has long been interpreted to apply to subclasses of mail.
[14] PRC is required to consider nine factors in making recommended
decisions on postal rates, including such factors as fairness and
equity and coverage of attributable costs. See 39 U.S.C. § 3622(b).
[15] A price-cap system could limit rate increases for certain postal
products and services according to a specified index, such as the
Consumer Price Index.
[16] 39 U.S.C. § 101(b).
[17] 39 U.S.C. § 404(b)(2).
[18] 39 U.S.C. § 404(b)(3)(4)(5).
[19] GAO-04-108T.
[20] GAO-04-238.
[21] U.S. General Accounting Office, Postal Pension Funding Reform:
Review of Military Service Funding Proposals, GAO-04-281 (Washington,
D.C.: Nov. 26, 2003); and Postal Pension Funding Reform: Issues Related
to the Postal Service's Proposed Use of Pension Savings, GAO-04-238
(Washington, D.C.: Nov. 26, 2003).
[22] Military service that became creditable after postal
reorganization would be for employees who did not have at least 5 years
of civilian service prior to July 1, 1971.
[23] U.S. General Accounting Office, Recent GAO Reports on the Federal
Employees' Compensation Act, GAO/T-GGD-97-187 (Washington, D.C.: Sept.
30, 1997); and Federal Employees' Compensation Act: Issues Associated
with Changing Benefits for Older Beneficiaries, GAO/GGD-96-138BR
(Washington, D.C.: Aug. 14, 1996).
